How to get the most out of spousal benefits

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Q. I will be 60 this summer and I plan to take my Social Security at age 66 in 2025, which would be $2,400 per month. My wife is two years younger, and I understand a spouse can take 50 percent of my benefit given that her benefit would be smaller. Her benefit at 62 would be $743 per month. When can she take benefits? I also understand if I wait until age 70 my benefit would be $3,000 per month.
— Working it out

A. The rules can be complicated, and you’re smart to want to maximize your benefits as a married couple.

Let’s go over the rules for Social Security retirement and spousal benefits and see how they apply to your situation.

Generally speaking, if you’ve been married to your spouse for at least one year, you can collect benefits on the earnings record of your spouse, even if you don’t have a work history of your own. This is called a spousal benefit, said Gene McGovern, a certified financial planner with McGovern Financial Advisors in Westfield.

“You can’t claim a spousal benefit, however, unless your husband or wife has already filed for his or her own retirement benefit,” McGovern said. “In your case, then, your wife cannot claim her spousal benefit until you file for your retirement benefits.”

If you’re eligible to collect retirement benefits on your own work history, as well as spousal benefits, Social Security essentially pays you the higher of the two, he said. For example, if one spouse’s retirement benefit is $1,000 per month, but his or her spousal benefit is $1,200 per month, the higher spousal benefit would be paid.

McGovern said Social Security makes the actual benefit computation by adding the excess of the spousal benefit over the retirement benefit ($1,200 – $1,000, or $200 in this case) to the retirement benefit of $1,000, bringing the total to $1,200.

Under Social Security rules, each of us has what’s known as a “full retirement age,” or FRA.

Your FRA depends on the year you were born.

“For most of us, FRA is between age 66 and 67,” McGovern said. “For example, if you will be turning 60 years old this summer, then you were born in 1959. For those born in 1959, the full retirement age is 66 years and 10 months.”

For anyone born in 1960 or later, including your wife, the FRA is age 67.

The other key term to know is “primary insurance amount,” or PIA. That’s the amount that Social Security calculates to be your monthly retirement benefit at your full retirement age, he said.

Regardless of your FRA, you can begin collecting Social Security retirement benefits as early as age 62. The same is true of spousal benefits, he said.

“If you take either benefit earlier than your full retirement age, however, the benefit amount is permanently reduced by a percentage of the applicable primary insurance amount,” McGovern said. “How much it’s reduced depends on whether you’re collecting retirement or spousal benefits. It also depends on your FRA.”

For retirement benefits, the haircut can be as high as 30 percent at age 62, he said. For spousal benefits, the reduction is even more, and can reach 35 percent at 62.

He offered this example: Beth’s PIA is $1,000 and her spousal benefit is $1,200. Assume her full retirement age is 67. If Beth files for benefits at age 62, five years early, her PIA would be reduced 30 percent, from $1,000 to $700. Her spousal benefit, however, would be reduced by 35 percent, from $1,200 to $785. Beth would receive $785.

On the other hand, McGovern said, if you wait to begin collecting retirement benefits until after your full retirement age, they increase by 8 percent of your PIA every year – or 0.67 percent each month – up to age 70. Benefits stop increasing at age 70, so there’s no advantage to waiting beyond then.

He said spousal benefits, by contrast, do not increase past your full retirement age, even though they’re reduced if you collect them early.

Now to your specific questions.

Your wife can file for her own retirement benefit as early as age 62. If she does so, her benefit will be reduced by 30 percent compared with filing at her full retirement age of 67. She can’t file for spousal benefits until you file for your retirement benefits, McGovern said.

Let’s assume that your wife files for her retirement benefit at age 62.

When you file for benefits at age 66, and your wife is then 64, she will automatically begin to receive her spousal benefit, assuming that’s higher than her retirement benefit, he said.

This occurs under what’s known as the “deemed filing” rules.

“Under those rules, for most people, if you are eligible for both a spousal and a retirement benefit, and you file for either one, you’re deemed to have filed for both benefits and automatically receive the higher of the two,” he said. “This also occurs if you’re already receiving one benefit and later become eligible for the other, as may occur in your wife’s case.”

As you point out, the spousal benefit generally equals 50 percent of the other spouse’s primary insurance amount at his or her full retirement age. That’s true regardless of what the other spouse is actually receiving from Social Security, he said.

McGovern offered this example: If your PIA is $2,400 per month at age 66 years and 10 months, but you start to collect it early, at age 66 exactly, your monthly benefit would be reduced to about $2,267. Your wife’s spousal benefit, however, would still be computed as 50 percent of your PIA of $2,400, or $1,200 per month.

How much of that $1,200 she receives, however, depends on the age at which she files (or is deemed to file) for a spousal benefit, he said.

Let’s take it further. If you file at your full retirement age of 66 and 10 months, and your wife is exactly 64 at the time and already receiving her own retirement benefit, her spousal benefits would be reduced because she’s deemed to be filing for them three years earlier than her FRA of 67, McGovern said. The reduction in this case would come to 25 percent, and her spousal benefit would then be about $900 instead of $1,200.

Here’s where it gets even more complicated.

“If your wife’s monthly retirement benefit at age 62 is $743, then her PIA at 67 would be about $1,061, or possibly higher if she is still working,” McGovern said. “That $1,061 is $161, or 18 percent more per month than the reduced spousal benefit of $900.”

So the question then becomes whether you and your wife are better off collecting early or waiting.

McGovern said the answer depends on a variety of things, including your cash flow needs, your health, and whether you and your wife are still working.

Consider speaking with a financial advisor who can look at your entire financial life to see the best strategy for you and your wife.

Email your questions to moc.p1574188218leHye1574188218noMJN1574188218@ksA1574188218.

This story was originally published on June 21, 2019.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.